The game of risk

Consider life's 'what-ifs'

You don't have to ask around a whole lot before finding someone who has a disdain for insurance.

It's costly. It's a scam. They'll try to weasel out of covering you when you have to make a claim.

These are some of the arguments people make to avoid dealing with an important need in their financial lives.

A recent survey commissioned by TD Insurance found 64 per cent of Manitobans would rather go to the dentist or stand in line at airport security than have a discussion about insurance. That likely has a lot to do with another finding -- most people underestimate the risks to their well-being.

The survey also found eight in 10 people are confident they are safety-conscious, even though other statistics indicate otherwise, says Craig Richardson, vice-president at TD Insurance.

"Eighty per cent of people we surveyed, for example, actually underestimated the likelihood of their house being broken into," he says.

"When you get into the details of the numbers from Statistics Canada, it's about one in 200 people."

Yet most people have home insurance because they know of someone who's been the victim of a burglary.

When it comes to their health and mortality, however, people often underestimate the risks, at least from an insurance perspective, says Dr. Edwin Weinstein, a psychologist who specializes in evaluating how people measure financial risk.

"It's like a little kid putting his fingers in his ears, and going 'la, la, la, I'm not listening,' " says Weinstein, president of the Brondesbury Group in Toronto, which helped TD develop the survey.

"Minds do that when something is too threatening."

Even though we often procrastinate planning for it, death is inevitable. Chances are most people can get along well without life insurance, disability and critical-illness coverage.

The odds are in our favour. Otherwise, insurers wouldn't be in business because it wouldn't be profitable.

Furthermore, most of us worker bees have coverage through our employers: short- and long-term disability and usually two times their salary in life insurance coverage.

That should be good enough, right?

"The answer may be yes or no," Weinstein says. "But there are very few people who take the time to assess independently of work if they have enough coverage."

Certified financial planner Bob Challis says one method to determine how much coverage you require is to think about the potential loss for unearned income.

"Many people give me the goldfish look when I use that term," says the insurance adviser with Nakamun Financial Solutions. "They've never considered their whole lifestyle going forward and that retirement is probably quite dependent on the income they have yet to earn."

While a lot of people have a good grasp of their current cash flow, and how well it funds their needs and wants, few think about that need for the next 10 to 20 years.

That's the potential lost income if you become disabled, severely ill or die during prime income-earning years.

The life insurance component is easier to understand, Challis says. You have young children and need to protect them until they're adults, so you purchase term life insurance to protect against lost income to your family in case you die.

"Worse is maybe if you can't work but you live," he says. "That five-year battle with cancer can be economically devastating."

That's where term critical-illness insurance, a tax-free lump sum paid out upon diagnosis of illness, may be a good fit.

The other option to protect against long-term ill health -- disability coverage -- provides a replacement for lost employment income until age 65, but it is a more complicated product than critical illness.

For individuals with coverage through their employer, purchasing additional disability coverage is likely unnecessary, Weinstein says.

For self-employed workers, it's a different story. But it's exceedingly difficult for the layperson to navigate the disability-insurance market to find the right product for their needs at the right price without professional help.

"I can ensure you that nobody knows what they're doing without an adviser," he says.

That's because what constitutes a disability can vary by policy.

"There's a difference, for instance, between disability in your own occupation and disability at any occupation," Weinstein says.

How this difference is interpreted can have major implications for coverage, because some disability insurance may only provide a benefit for a few years until the insurer deems that, although you can't work at your previous job, you are capable of working in other occupations, he adds.

More broadly speaking, the greatest need for insurance coverage depends on your age and situation in life. If you're nearing retirement, or retired, the need to cover risks with life and critical-illness insurance might not be worth the cost -- especially if you've already got substantial savings and a pension to rely on.

In addition, a 25-year-old fresh out of college with a job, very little debt and no dependents may have little need for coverage.

"A25-year-old student is going to have very different needs than a 40-year-old couple with a child," Richardson says.

Breadwinners with a big mortgage are well-advised to consider life and critical-illness coverage to make up for potentially lost income and to pay for liabilities such as the mortgage.

It's not even a bad idea for the 25-year-old to get coverage early if he or she has room in the budget, Challis says.

"If those 25-year-olds have in their future plans children and debt, it might be a good idea to buy as much of this cheap stuff as they can get their hands on to lock in their pricing, but more importantly to lock in their insurability," he says.

"From the point that they will have some insurance in place, and regardless of their future health or activities, they will never have that insurance taken away from them or refused renewal."

In that respect, insurance is like most other aspects of personal finance (investing). The sooner you start, the less it will cost and, of course, the better off you'll be in the long run.

What a difference 15 years can make

Coverage for both life and critical illness is cheaper the earlier you apply for it. While not everyone requires it while young, nor can they necessarily afford it, applying for coverage sooner than later in your adult life is generally less costly, and it puts you in a good position for continuing to qualify for further coverage as you age, regardless of health in many cases. Here's a look at the annual premium cost ranges from several insurers for a 25-year-old non-smoking male and 40-year-old non-smoking male for life and critical illness coverage.

$1-million life insurance benefit, 10-year term:

25 years old: $430 to $550

40 years old: $535 to $720

$1-million life insurance benefit, 20-year term:

25 years old: $570 to $735

40 years old: $955 to $1,137

$500,000 critical-illness benefit, 10-year term:

25 years old: $875 to $1,137

40 years old: $1,905 to $2,330

$500,000 critical-illness benefit, 20-year term:

25 years old: $1,076.10 to $1,300

40 years old: $2,650 to $3,250

-- Nakamun Financial Solutions

Premium pricing: Cheaper annual premium quotes can sometimes be misleading, says adviser Bob Challis. Some companies are more aggressive with initial quotes of premiums to attract customers. But after the underwriting process (i.e.: health physical), the premium price will increase. More established insurers, however, often aren't as aggressive with their pricing so their advertised premiums will be higher. But that price is likely to remain the same even after the underwriting process.

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